FOMC Rate Hike Incoming – Will Markets Rally?
The S&P closed down 0.62% from last Tuesday’s open to Friday’s close.
The weekly SPY chart still gives me reasons to be constructive, but the daily chart, market internals, and sector participation leave me skeptical that Friday’s CPI gap up marks the start of a sustained recovery.
With FOMC on Wednesday, I’m watching whether buyers can repair the trend and whether the Fed can restore its credibility.
The Fed Can’t Pump More Oil
August’s CPI inflation numbers rose 0.4% month over month with gasoline driving more than a third of the monthly increase.
The weekend news is that Saudi Arabia’s East–West pipeline remains shut, and buyers estimate Yanbu’s stored oil could cover only five to seven days of exports without a restart. Not helpful to the inflation outlook.
The Fed can raise borrowing costs, but it cant pump more oil.
Shelter is perhaps the most compelling reason that the Fed cant look through this report as continued “energy shocks.” Note in the graphic above it is the second largest contributor to the month over month increase.
Odds favoring a rate hike have EXPLODED from 52% just two weeks ago to 87.3%. This has been consistent with our view that ever since Jackson Hole Kevin Warsh has sealed his fate of having to raise rates in the next meeting.
Most importantly we should watch how the market responds to the hike on Wednesday and how Warsh addresses it in the press conference to follow.
Based on the graphic above, markets are pricing in aggressive hikes. Four in total. If Kevin Warsh can do a good enough job of acknowledging the inflation problem, hiking gently, and talking the market out of thinking in extremes, the result may be easing 10 year rates in turn allowing equities to rally.
If Kevin Warsh does not hike, and credibility goes out the window, the bond market will punish him and in turn the equities market.
FOMC expectations and reactions are the main focus headed into this week.
Anthropic Wants To Pace The Race
Antrhopic CEO Dario Amodei spent the weekend thinking about how “We Must Pace The Frontier.“
The premise of the blog post is such that AI is getting to the point of being able to self improve fast enough that it may get out of control. As a solution Dario suggests a slew of AI regulation from embedded evaluation, shared standards, and international coordination.
Image from 0xcarlisle on X
I’m not here to argue if we should or should not pace the race. I’m also not here to say I 100% trust hyperliquid weekend market pricing.
It is interesting however to think about how the market will respond to this and see where expectations are broken or held up. If markets think there will be a slow down in AI development, does that materialize as weakness in the hardware names? Does this provide more drag to a market that has already been lethargic to get up off the mat?
Aside from FOMC and financing costs based on rate expectations, this will be the second focus of the week.
Do the hardware and datacenter names that just started to wake up (AMD, INTC, DELL, NBIS, BE, MRVL, SKHY, MU, etc..) continue showing signs of improvement? Or do they flop back down into ranges and refuse to break to higher highs?
After doing some more digging this weekend, it seems to me the market will shrug this particular scare off and continue looking constructive. If I’m wrong in that belief and Warsh doesn’t deliver on Wednesday… look out below.
As always the charts light the way against this fundamental backdrop, so lets jump in.
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Broad Market Analysis
SPY – Weekly
Last week produced a red bodied hammer with a lower high and lower low, but buyers were able to close back in prior week range. The lower wick respected the area around 754.75, preserving the opportunity for a weekly higher low.
I still see a bull flag above the 10-week and 20-week moving averages, with support from the larger anchored VWAP references and prior volume structure. A resistance trendline break could unlock continuation higher. The weekly chart remains constructive enough that I want confirmation before becoming more aggressive on the bearish side.
SPY – Daily
Friday’s CPI gap up produced an inverted hammer and a weak close near the session lows. SPY remains beneath a declining 20 SMA and 8 EMA as well as the 767.85, the former flag floor. Thursday established a lower low at the 50-day SMA, making Friday a potential lower high.
SPY – Hourly
After four days lower, Friday’s rally may have corrected overly short inventory. I still need evidence that buyers can establish an uptrend. 767.85 remains the key resistance reference, reinforced by the 61.8% retracement and the overhead anchored VWAP structure. If buyers fail there early in the week and break Friday’s low the downside case builds momentum.
The more compelling bullish sequence would be an early downside test that establishes a higher low against Thursday’s high (gap fill reversal), followed by a break above 767.85. That would create a higher low and higher high while showing that the market can absorb the inflation news.
Our tension here is daily lower high vs look below and fail on the balance range.
Market Internals – NYSE
Friday’s gap up lacked convincing confirmation from new buying at the exchange level. Volume flows were unimpressive, advance/decline fell out of its bullish trend zone, and the index score failed to sustain strong readings. Cumulative TICK also trended lower intraday and finished bearish.
I cant look at that combination and say buyers were aggressively accumulating throughout the session. It leaves me thinking plenty of the morning gap up was just short covering.
Market Profile – /ES
Friday established higher value and preserved separation from Thursday, which deserves some credit. Sellers had an opportunity to press harder into the gap and did not fully capitalize on it.
The distribution still looked like a market balancing after a gap, with little upside range expansion. Not much evidence here of a trend session or a fresh wave of committed buyers. Holding higher value helps the bullish case, but the profile does not yet suggest that a new leg higher has begun.
The More I Look; The More Skeptical I Get
The Mags look okay, the XLY looks horrible, the XLC has gone no where, and the XLF could use a breather. Maybe we’re starting to get to the point of oversold in some of the sectors and we’ll see relief rallies, but structurally, these do not look like great charts I’m itching to buy.
QQQ – Impact on S&P
Qs didn’t make a lower low on Thursday, and are already in the upper half of the range. Staying above 714 and accepting above 722 would favor a gap fill toward 729.20. A higher low after that would make that recovery MUCH more constructive. Acceptance beneath 707 instead opens the path toward 692.
With price compressed between anchored VWAPs and the moving averages looking like spaghetti, I see little benefit in forcing a directional opinion inside the range.
If you want the full take, including all of the nuance of breadth, risk appetite and much, much more, check out the weekend episode here:
Economic & Earnings Calendar
Top watches: LEN
Swing Stock Scans
GLW – Daily Chart
If optic names are going to come back, this looks great having reclaimed the 50 SMA (blue) and producing a tight consolidation. Over 169.7 gets interesting.
QMCO – Daily Chart
Look below and fail under the Thursday low giving a daily hammer. Over 23.5 we have a higher low and a great hold over the 20 SMA (orange).
SMCI – Daily Chart
Quasi cup and handle over the moving average stack. DELL probably better option, but too far gone for now. Over 41.60 and this has a shot at running again.
VRNS – Daily Chart
Great weekly pennant with daily hammer over the 20 and 50 SMA stack. If this takes back out 45.70 we have a higher low and a shot at continuing the weekly inverted head and shoulders thats in play.